Estate Planning

Given the state of the economy and the threat of Medicare and Social Security cuts, “retirement” has unfortunately become the new dreaded dirty word in households.

While plans to cut expenses are being discussed far earlier than retirement in today’s world, the expense-cutting is permanent within the context of a retirement discussion.

One area in which to consider cutting expenses is your life insurance premium. Life insurance is often purchased when the covered individual is younger, with a large enough death benefit to cover one’s family, mortgage, estate taxes (where applicable) and other areas should the covered individual pass on.

At retirement, however, that same covered individual may not need to be concerned about leaving money to send children to college or to pay off his or her mortgage. As a result, there may be room to lower one’s premium in exchange for a change in coverage.

Rather than get a new policy — which may result in higher premiums if you go through the underwriting process again — consider the following 3 ways to potentially lower your premiums on your existing policy:

2. Inquire about Flexible Premiums: Obtain an illustration from your advisor or agent with a reduced death benefit or the maximum tax-free cash flow that may be obtained without requiring more premium to support you past your life expectancy.

As with all changes to your insurance policy contributions, make sure you have a discussion with your advisor or insurance agent and receive an illustration first (for example, so that you don’t inadvertently turn your policy into a Modified Endowment Contract or MEC, and incur taxes and penalties on withdrawls).

Given how each president more often than not tweaks the country’s tax rules as well of other related policies after entering the White House, it’s a good idea to revisit certain techniques in order to reconfirm their effectiveness in a new policy environment. One set of techniques centers around wealth transfer.

A common question that recurs every few years is what are ways to pass money to future generations in the family without increasing the donor’s nor the beneficiary’s tax burden?

Below are five techniques to consider:

Life Insurance: While it’s slightly more common to use life insurance to support surviving family members after the death of a loved one, it also may be used to pay taxes on estates. And if the insurance is payable to beneficiaries through an irrevocable trust, you may avoid having the proceeds count towards the value of your overall estate.

Business Buyout: Many families in this economy are launching their own businesses. Retiring shareholders can sell their portion of the business to younger generations in the family in an internal family buyout. The retiring shareholder then receives cash to help fund retirement, and the family sustains the independence of their family’s company while receiving potentially substantial tax benefits if the buyout is structured correctly.

Account Beneficiaries: Adding a beneficiary to your 401K/IRA/Life Insurance/et al enables beneficiaries to have more choices in how they receive the proceeds from an inherited account instead of forcing a family member to receive a lump sum and an immediate ordinary income tax bill.

Gift Transfers: “Giving while living” has the benefits of reducing one’s taxable estate while leveraging the kinder gift tax rules to transfer wealth. This technique may generate estate tax savings upwards of 25%, and in some cases even more savings may be possible.

Transfer on Death: Non-retirement accounts may be enhanced with a transfer on death policy, which may be beneficial if your non-retirement account has securities bought at a much lower price than the present day value (e.g., low cost basis securities). The basis or purchase prices of your securities are adjusted to their fair market value upon your death, which may provide your beneficiary with tremendous capital gains tax savings if this results in a step up in basis.

Regardless of the method, talk with a qualified advisor to help ensure that your wealth transfer strategy reflects the latest policy changes.

Prospective clients in their 30’s often approach me with the same question: what should I be doing?

It’s almost instinctual that we replace “want to” with “should be” during this decade. With our 40’s in the lineup as the next decade marker, it’s no wonder that the responsibility clock begins to tick louder prompting young adults to make important life decisions while time and energy are still on their side.

As an advisor (as well as a detail-oriented, meticulous person), it’s very exciting for me to see someone take steps to clearly define his or her goals and put in place a plan to reach them. It’s particularly exciting to meet with a young adult since it often brings the challenge of allocating a stream of income across multiple goals that will come to fruition over the course of 30-40 years.

While it may feel as if you need to address an endless “should be” list of personal finance items, key personal financial seeds to sow in this age group towards securing your future typically fall within the following six categories:

Retirement Planning

When do you want to retire, and how? Your answers will dictate how much you need to start saving today, whether you need to invest to potentially increase your rate of return, and how to leverage the various retirement accounts available to you.

How you save for retirement (or semi-retirement) may be one of the most important decisions you make today since the growth of your savings is a factor of time and technique. Using a retirement calculator is an excellent way to visualize how frequency, duration and rate of return all make an impact.

Also keep in mind that not all retirement accounts are the same. For example, a 401K plan has limited investment options compared to a Roth or Traditional IRA. Higher income earners may also consider tax-deferred insurance-based products with principal guarantees (yet often also with surrender penalties). An advisor can help you determine what’s appropriate for your goals.

Insurance

Does anybody depend on you or your income? Or if you looked around right now and suddenly lost something you see, would that hurt your financially?

If you answered yes to any of these questions, consider getting an insurance policy. Insurance is available for a laundry list of things including life, health, disability, home, car, floods, and renter’s. Even key person insurance is available for insuring against the loss of a business partner, or personal liability insurance for if you’re personally sued by someone (for example, if your dog bites your neighbor).

If you get insurance through your job, it may be cheaper than if you got a policy directly with an insurance carrier. However, you may lose coverage when you change jobs or retire. As a result, consider getting your own policy. If you’re young and healthy, you may be able to lock in a reasonable premium for the lifetime of your contract.

Life Events

Are you planning to have children? Or get married? Start a business? You may need to weigh the financial requirements for each against you ability to save for retirement and pay for insurance.

Once again, a variety of savings techniques are available with advantages and disadvantages that could help or hurt your overall financial picture.

For example, saving to a state 529 college savings plan may provide you with a state tax write-off. However, where you incorporate your business and the business structure you choose may incur either a higher personal tax burden or potential personal liability risks.

Estate Planning

If you pass away tomorrow, do you have a plan in place to transfer your assets to a beneficiary? If not, you may run the risk of a judge deciding who gets your savings and even who gets the things in your apartment. This could result in a creditor getting your prized rock guitar collection, and not a relative.

Your plan may include creating a will, ensuring that your retirement accounts and insurance plans have up-to-date beneficiaries, or ensuring that you have a trust established to transfer assets to a child or charity with ideally a low tax burden.

Real Estate

Do you have plans to buy a home in the future? Upgrade to a new home? Or to buy a vacation home? Are you considering investing in foreclosed properties, or flipping? Are you thinking about buying commercial real estate for your business?

Success in each of the above requires lining up the right advisors, planning towards having a successful transaction that you can afford, and hedging against market changes (including property tax changes) that aren’t in your favor.

What if you’re deciding between buying and renting? The jury is out on whether home prices will continue to decline. But if you currently cannot afford the costs associated with buying a home, realize that other options exist.

For example, you can participate in the real estate market at a lower cost and higher liquidity with REITS (e.g., real estate investment trusts, which trade like stocks) and potentially receive a stream of income from your investment. Or simply invest your money elsewhere to get the long term return that you may be seeking.

This is not intended to be the complete list of areas that you need to consider since all situations are different. However, this may be a good place to start to begin organizing your “should be” list before the ticking clock turns into time bomb. If it ends up being all too complicated or if you’re concerned about putting the right plans in place, then you may need to speak with an advisor that you know and trust. That’s what we’re here for.

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About The Wall Street Geek

After turning $1100 into $7015 in the stock market right out of college, the author of "The Wall Street Geek" worked for 15 years on Wall Street. In this investment blog, she gives investment tips and insights to help everyday investors be successful. Read More >>

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